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Growth in Tight Oil Shakes Up Futures Markets and Hedging Needs

(Bloomberg) -- The vibrations of the shale boom are now shaking the futures market.

A visible decline in open interest of West Texas Intermediate crude futures contracts for delivery five or more years in the future is due to the growth of tight oil fields and the shift in producers’ need to hedge oil so far out in the future, according to a study by the U.S. Commodity Futures Trading Commission. That’s because oil extraction has become more efficient in tight oil fields compared to conventional wells and producers have more flexibility in turning on and off the taps in response to oil prices.

The increasing amount of crude coming in from tight oil in portfolios of production firms has left them with less crude to sell five or more years forward, reducing their need for long-dated futures contracts, according to the study. U.S. weekly production has skyrocketed to 11 million barrels a day, the highest level on record, according to Energy Information Administration data.

The Market Intelligence Branch in the Division of Market Oversight conducted research and analyzed data from Jan. 3, 2003 and March 30, 2018.